Debt-laden Dubai sends world sharemarkets reeling

World financial markets are reeling after Dubai announced its flagship company, Dubai World, is close to defaulting on what is effectively sovereign debt.

The government of Dubai announced it would ask to postpone payments on Dubai World’s debt, estimated at $US60 billion, for six months.

Dubai World is a global operator of ports and the parent company of Nakheel, Dubai’s largest property company. Nakheel has a $US4 billion Islamic (no interest) bond due on December 14 that it cannot repay.

Credit agencies immediately cut ratings of Dubai debt, sending European shares to their biggest one-day drop since April. In Canada, the only North American sharemarket trading, the main index dropped 200 points.

In Europe, banks were the biggest decliners, with HSBC, Lloyds, Royal Bank of Scotland and Barclays all down more than 4% in London, Deutsche Bank down 5.9% in Frankfurt and Société Générale slipping 3.6% in Paris.

Reports said European banks face potential losses on an estimated $US40 billion, though most banks said their exposure was small or declined to comment.

Credit Suisse analysts estimate Dubai World accounts for about $US60 billion of the city state's $US80 billion in liabilities, with half of that held by European banks.

The pan-European Dow Jones Stoxx 600 index closed down 3.3% at 239.85, a level not seen since early November.

The UK FTSE 100 index closed down 3.2% at 5194.13, the French CAC-40 index ended down 3.4% at 3679.23 and the German DAX index closed down 3.3% at 5614.17.

Wall Street was closed on Thursday for the Thanksgiving holiday after finishing at a 13-month high on Wednesday. In Canada, stocks fell the most in a month, led by commodity producers, as metals and oil prices retreated.

Suncor Energy and Teck Resources fell at least 2%. Bombardier, the world’s third-largest maker of commercial aircraft, lost 3.4% after saying it will slow production of its CRJ regional passenger jet and lay off workers because of weak demand.

The S&P/TSX Composite Index plummetted 200.10 points, or 1.7%, to 11,436.80, the biggest drop since October 28.

Commodities: Oil, gold down

Oil futures fell in electronic trading in New York as US stockpiles increased to 337.8 million barrels in the week to November 20.

Floor trading in New York was closed because of Thanksgiving. Crude oil for January delivery fell as much as $US1.11, or 1.4%, to $US76.85 a barrel in electronic trading and was recently at $US77.07 a barrel.

Gold has fallen for the first time as a stronger dollar prompted investors to sell the metal after it reached a record.

Bullion earlier rose to an all-time high for the third time this week after Sri Lanka purchased 10 tonnes from the International Monetary Fund for about $US375 million. India, Russia and Mauritius have also made purchases.

Gold for immediate delivery dropped $US7.40, or 0.6%, to $1184.40 an ounce in London. Futures for February delivery in New York dropped 0.3% to $US1185.30 an ounce after earlier reaching a record $US1196.80. Floor trading is shut for Thanksgiving.

Currencies: Yen up, dollar down

The US dollar edged back up after Wednesday's drubbing amid a fresh bout of investor nerves surrounding the possibility of a debt default by Dubai.

The yen rose to a 14-year high against the dollar on speculation Japanese monetary authorities will tolerate further appreciation of the currency.

Finance Minister Hirohisa Fujii said the government needs to take action on “abnormal” currency movements and Prime Minister Yukio Hatoyama said the yen’s appreciation was due to weakness in the dollar.

The Swiss franc fell against the dollar on speculation the nation’s central bank sold the currency after it climbed to parity with the greenback for a second day.

The yen rose to ¥86.30 per dollar, the strongest since July 1995, before trading at ¥86.60 in London from ¥87.35 yesterday in New York. US markets are closed for Thanksgiving.

The dollar traded at $US1.5029 per euro from $US1.5134 on Wednesday, when it slid to $US1.5144, the weakest since August 2008.

The yen advanced to ¥130.13 per euro from ¥132.21. The Swiss franc fell 0.8% to 1.0039 per dollar.